Canadian policymakers have ample reason to be patient in making further rate hikes, says CIBC economist
Among three major economies, Canada is actually seeing the “least bad” inflation levels and core measure readings, according to Avery Shenfeld of CIBC Capital Markets.
In his new analysis covering Canada, the United Kingdom, and the United States, Shenfeld said that Canada’s 4% August annualized inflation reading (3.6% excluding food and energy) fared significantly better compared to the UK’s 6.3% (5.9% excluding food and energy) and the US’s 3.7% (4.3% excluding food and energy).
And while inflation excluding food and energy is not the Bank of Canada’s usual benchmark, the “Fed’s trimmed mean for the US CPI is at 4.5%, about a half point above Canada’s trimmed mean, one of the BoC’s two preferred indicators,” Shenfeld said.
At the same time, despite Canada’s underlying inflation being in better straits compared to the two other economies, “it’s also not the best in recent economic performance, a reason to be patient in delivering any further monetary tightening,” Shenfeld said.
“The UK picture isn’t stellar, and it’s suffered a larger climb in the jobless rate from its lows than Canada. But certainly, the US has seen much less evidence of a growth slowdown. It’s miles ahead of Canada in per capita GDP gains this year, and has seen a smaller bump in its jobless rate.”
The Conference Board of Canada's research highlights that while Canadian provinces face common growth pressures, localized factors will influence their GDP growth.
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Possibility of rate hike lower in Canada
Shenfeld said that taking these developments and other existing market factors into account, “being the least bad in underlying inflation, and not the best in recent growth, should mean that the odds of another hike in Canada, or a more protracted wait for the first rate cuts, are lower than they are in the US.”
Any further hikes would be unnecessarily “punitive” for a lot of Canadians who took on low-cost mortgages during the historic lows in rates back in 2020.
“Sure, Canada’s inflation numbers, like those elsewhere, are too high to completely rule out a further rate hike, should upcoming employment and CPI data surprise us on the upside,” Shenfeld said.
“But we shouldn’t assume that either a further hike, or the pace of rate cuts, will be glued to whatever proves to be the right approach for the US if Canada’s economy continues to look not quite as resilient as its American neighbour.”
